Saskatchewan advantage means oil activity surges while Alberta lags

One mile away from the Alberta border, on land in Saskatchewan owned by the Onion Lake Cree Nation, BlackPearl Resources Inc. is building a second thermal heavy oil project while keeping its larger Alberta opportunities on hold.

With a more welcoming business climate that includes no carbon tax, more efficient regulation and lower royalties, its thermal heavy oil projects in Saskatchewan are economic at US$45 a barrel oil, while those in Alberta using identical technology require US$55, said president John Festival.

For decades, “Alberta has been very exciting for the oilsands because it’s been so big,” Festival said in an interview. “But at these prices, you can’t build new projects. In Saskatchewan we are doing a similar thing as we are doing in the oilsands of Alberta, except in smaller projects.”

A surge in interest in Saskatchewan oil by companies like BlackPearl, motivated to get back to work after an extended oil price downturn, means the province is experiencing a healthy rebound in activity this year, while Alberta’s oilpatch continues to struggle as capital and companies move elsewhere.

Saskatchewan is Canada’s second largest oil producer after Alberta.

Capital spending

According to the Canadian Association of Petroleum Producers, capital spending in Saskatchewan will bounce back to an estimated $6.1 billion in 2017, from $3.5 billion in 2016, $4.2 billion in 2015 and $6.7 billion in 2014.

Meanwhile, investment in Alberta’s oil and gas is expected to recover modestly this year to an estimated $31.1 billion, compared with $27 billion in 2016, $39.9 billion in 2015, and down sharply from $60.6 billion in 2014.

As many as 2,600 wells are expected to be drilled in Saskatchewan this year — compared with 1,557 in 2016, 1,617 in 2015, and 3,638 in 2014. Sales of drilling rights on crown lands are on the upswing, with June’s offering attracting $22.8 million, the biggest response in three years.

“Things are picking up in Saskatchewan,” the province’s energy minister, Dustin Duncan, said in an interview.

Interest in the province is at least partially motivated by concern about energy and environmental policies by the Alberta NDP government and the federal Liberal government, along with Saskatchewan’s refusal to implement a carbon tax, he said.

“I am from Weyburn in the southeast part of the province and a lot of companies are putting ‘for hire’ signs back up,” he said. “We are all cautious, but we are feeling a lot better than we were a couple of years ago in the patch here.”

It’s not the first time Saskatchewan has benefited from energy policies in other places. A similar re-allocation of investment occurred when Alberta increased royalty rates a decade ago under former Conservative Premier Ed Stelmach.

When BlackPearl had to choose between building the 80,000 barrel a day Blackrod project in Alberta, or expanding at Onion Lake, the advantages offered by Saskatchewan couldn’t be ignored, Festival said.

His junior company decided to invest $180 million to double production to 12,000 b/d at Onion Lake, while the Alberta project, which requires $800 million for the first 20,000 b/d phase, will be on hold until oil prices recover above US$55 a barrel.

Saskatchewan’s advantages

Festival listed off a number of Saskatchewan’s benefits: capital costs are lower because deposits are located near populated centres that offer existing infrastructure like roads, pipelines and housing for staff; there is no requirement to recycle water because the industry is smaller; deposits yield higher quality oil that command higher prices; royalties (set at the same level by the Onion Lake band as by the province) are lower; and regulations are more efficient. The veteran engineer worked early in his career for Koch Exploration Canada, then with his Koch team formed BlackRock Ventures Inc., an oilsands upstart sold to Royal Dutch Shell PLC for $2.4 billion in 2006.

“It took us four years in Alberta to get our regulatory approval for our project in the oilsands … and a lot of expense to get that done, whereas in Saskatchewan it’s only four months,” he said. “It was a much streamlined process, much simpler and much less cost.”

Alberta requires more study, particularly on environmental impacts, while Saskatchewan developed a set of rules it expects everyone to follow, Festival explained. But there is in no difference in stringency and both regimes result in similarly safe and environmentally sound projects, as his own company is proving.

More companies would move there if the province had bigger resource potential, Festival said.

Saskatchewan’s downside is that its deposits aren’t big enough to generate a lot more activity.

The province produces about 450,000 barrels a day, a tenth of Alberta’s volume. It comes from shale formations like the Bakken, conventional heavy oil and thermal heavy oil, which is similar to in situ oilsands in Alberta. It has some small oilsands deposits near Fort McMurray, but they have yet to be developed.

Rankings

According to the Fraser Institute’s most recent Global Petroleum Survey, Saskatchewan was ranked by oil and gas industry executives in 2016 as the fourth most attractive jurisdiction around the world for investment (behind Oklahoma, Texas and Kansas) up from seventh a year earlier. Alberta, meanwhile, was 43rd out of 96 jurisdictions, down from 25th a year earlier.

The favourable view recently prompted Saskatchewan Premier Brad Wall to invite energy companies to move their head quarters from Alberta, and energy minister Duncan to propose to Ottawa move parts of the Calgary-based National Energy Board to Saskatchewan. No one took up the premier’s offer to move head offices so far, Duncan said, but the door remains open.

Saskatchewan’s biggest spenders are Husky Energy Inc., which like BlackPearl is involved in thermal heavy oil, and Crescent Point Energy Corp., which produces light oil from the Bakken.

Husky spokesman Mel Duvall said his company builds projects in Saskatchewan a lot faster than in other places. The company produces 80,000 b/d from thermal heavy oil projects alone in the province and plans to add a further 40,000 b/d at a cost of $1 billion.

“Typically we can take a project from sanction to completion in three years, and it’s difficult to match that kind of speed elsewhere,” Duvall said.

Husky also plans to build a second asphalt refinery near the provincial boundary in the Lloydminster area. It has yet to decide whether it will be on the Alberta or Saskatchewan side of the border.

With its shale plays straddling the Canada/U.S. border, Saskatchewan is not changing its position on the carbon tax because it would lose investment to other jurisdictions, Duncan said. Instead, it will continue to support technologies to reduce emissions like carbon capture and storage, of which Saskatchewan was an early adopter, he said.

“We share the Bakken formation with North Dakota, and they are not going to have a carbon tax, nor is the Permian play in Texas,” Duncan said.

Carbon taxes come up regularly in meeting with investors, particularly in the U.S., and it turns them off, Festival said. They worry about future carbon tax increases, continuing pipeline bottlenecks, and other policy uncertainties that other regions don’t have, he said.

BlackPearl is painted with the same brush even if its projects are in a no-carbon tax province and more attractive than shale plays in the U.S. because of low production declines.

Brad Wall “needs to send a message to Ottawa that these carbon taxes are hurting Canada and re-directing funds into other places,” said Festival. “All it does is hurt companies like BlackPearl.”

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